Report Updates
We have updated reports on Ag Growth International (AFN) and Stella-Jones (SJ). One has benefited from higher lumber prices but has been more stable and less cyclial than its peers over the years due to its business model. The other will likely benefit from tailwinds in crop prices and volumes and is also developing sales in its technology segment.
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New Report
We have initiated coverage on Topicus.com (TOI). This company was spun out of Constellation Software (CSU) earlier this year and is focused on the European software space. We consider it to be a "mini-CSU" given CSU's continued ownership stake and voting interest. Like CSU, we see lots of runway potential for this name.
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5i Coverage companies acquired
With strong M&A activity in recent months, we have seen quite a few of our coverage and model portfolio companies get taken over the last several months. We thought it would be worth highlighting recent coverage companies that been acquired (or have been put up for sale):
December 2020: People Corp (PEO) taken over at a 37% premium last year by Goldman Sach's.
March 2021: New Look Vision (BCI) taken over at a 37% premium at $50 per share by a group of fund managers including Caisse de dépôt et placement du Québec.
May 2021: Photon Control (PHO) was announced to be acquired at a 26% premium at $3.60 by MKS Instruments (a US-based semiconductor equipment company). The transaction is still pending.
May 2021: A proposal by management to purchase Dye & Durham (DND) at a 23% premium at $50.50 per share. However, this has not been finalized.
What these companies all have in common is that they have leading market positions, a good trend in fundamentals and quality management. We believe that looking for quality names is key to solid returns and we hope to continue providing our members with more names like these, whether they get acquired or continue to grow and provide shareholders with long-term value.
Market Update
The equity markets were largely flat over the last month. With valuations still at elevated levels and some volatility in early May, investors may be concerned about the outlook for the markets, especially as inflation numbers continue to come out. As 'fuzzy' as the outlook may seem, here are five things that keep us optimistic about the long-term outlook for both the economy and the markets going forward.
1) Infrastructure spending
Studies show that increased spending on infrastructure tends to be the hallmark of a post-economic recovery as governments focus on revitalizing the economy. We find this in recent history after the 2008 recession. News headlines have many focused on Biden’s proposed $1.7 trillion infrastructure package, but many countries, including Canada and Europe are also increasing their infrastructure spending programs by the billions. Not only does building infrastructure create more jobs; more bridges and roads also facilitate more economic activity (eg. more trucks can transport goods faster etc).
2) The VIX is trending downwards
While the VIX does not measure volatility for all markets (it focuses on S&P 500 companies), it does a good job of reflecting the general market sentiment (or 'panic levels') in equity markets. Chances are if the VIX spikes, there will also be high volatility in the Nasdaq, TSX and other developed and even emerging markets. In the year 2020, the VIX saw one of its highest points on record and since then has been trending downward with bouts of volatility in between. When comparing to days prior to COVID, the VIX seems to be approaching levels we have seen in the past (see chart below). While the VIX can 'turn' quickly, it does appear that we are working our way through some of the volatility we have seen in the last few months.
3) At the cusp of re-opening
In the last few months, vaccination rates have improved significantly with more than half of the US population receiving their first dose and about 40% being fully vaccinated. The US announcing a no-mask policy for people who are fully vaccinated is an encouraging sign as well, with some states targeting mid-June for a full re-opening with no masks. Canada is a bit behind with only 4% of the population fully vaccinated but has even a higher percentage of the population with their first dose (~57%). That said, it seems to be just a matter of time before populations are fully vaccinated and things can fully re-open again. For the markets, the uncertainty around lockdowns and when they will ‘end’ seems to be fading and this should bode well for markets going forward.
4) Employment numbers are improving
Generally, things are heading in the right direction employment wise, which of course, is a good sign in any economic recovery. Considering where we were a year ago, there seems to be a lot more clarity for companies who have by now, adapted work environments and have a good understanding as to what COVID safety measure to take. We expect many companies will be looking to reshuffle, hire more workers for additional capacity and new roles in preparing for a re-opening. In both Canada and the US, the number of jobless claims fell to the lowest level since the start of the pandemic. An interesting note worth mentioning is that relief payments have been more attractive than minimum wage for some people. This caused many states in the US to retract federal funding for pandemic relief to fill in labor shortages and encourage people to get back to work.
5) Strong Corporate Earnings
If there is one thing that gives us confidence in the outlook for equity markets it is robust earnings growth. Earnings results continue to be generally solid over the last few quarters, and notably, in the recent quarter 86% of S&P500 companies (90% of which already reported) beat estimates, which is the highest number since the last major recession in 2008. Of course, we do not mean to say this is a precursor to a new 11-year bull run, but certainly strong earnings growth that surpasses expectations generally does not hurt the outlook for markets.
All of the points above are encouraging for most if not all sectors, even sectors like technology that have had a rough patch over the last few months. As we get closer to a clearer picture of what a post-COVID world will look like and economic recovery, we think it is as important as ever to filter out short-term noise in the market and focus on the underlying fundamentals that will drive growth which we think will ultimately drive the markets in the long-run.
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